Key Takeaways
- • The U.S. Postal Service states that a 2006 law requiring it to pre-fund retiree health benefits is a major driver of its financial losses, and it is seeking congressional relief.
- • Shifting to a traditional "pay-as-you-go" method would generate an average of $5.65 billion in additional annual cash flow through 2016 and save an estimated $50 billion over ten years, according to the Postal Service.
- • The Postal Service paid its $5.5 billion fiscal-year 2010 pre-funding installment after Congress declined to grant a deferral, and it warns that forecasts show insufficient cash for a similar September 2011 payment.
- • Mandated pre-funding payments range from $5.5 billion to $5.8 billion per year through 2016, a schedule the Postal Service describes as unique among public and private entities.
Summary
The U.S. Postal Service (USPS) says a legislative requirement that it pre-fund retiree health benefits is a significant contributor to its financial losses. Under a 2006 law, the Postal Service must make pre-funding payments of $5.5 billion to $5.8 billion per year through 2016. The agency describes this obligation as unique: unlike other federal agencies and most private-sector companies, which use a "pay-as-you-go" system and pay premiums as they are billed, USPS must pay today for benefits that will not be due until later.
According to the Postal Service, switching to pay-as-you-go would produce an average of $5.65 billion in additional cash flow per year through 2016 and save an estimated $50 billion over the next ten years. The agency announced an Action Plan in March and has requested that Congress restructure the obligation.
Relief has not yet been granted. Congress provided a deferral in 2009, allowing USPS to pay $4.0 billion less than the originally required $5.4 billion payment. This year, however, Congress declined to provide a deferral. Without legislative relief, the Postal Service was required to make, and did make, its $5.5 billion payment to the Retiree Health Benefit Fund. The agency had sought a deferral to reduce the risk of defaulting on financial obligations in fiscal 2011, and it says that risk remains. Current forecasts anticipate insufficient cash to make a similar $5.5 billion payment in September 2011, even with planned cost controls.
The Postal Service notes that it has already implemented aggressive cost-cutting and productivity measures, and it continues to press Congress both to shift away from the pre-funding mandate and to address what it describes as an overpayment to the Civil Service Retirement System pension fund. The agency argues that these changes are necessary to remove constraints on its cash flow during periods of declining mail volume and to ensure it remains a viable business. All fiscal years referenced end September 30.
According to the Postal Service, switching to pay-as-you-go would produce an average of $5.65 billion in additional cash flow per year through 2016 and save an estimated $50 billion over the next ten years. The agency announced an Action Plan in March and has requested that Congress restructure the obligation.
Relief has not yet been granted. Congress provided a deferral in 2009, allowing USPS to pay $4.0 billion less than the originally required $5.4 billion payment. This year, however, Congress declined to provide a deferral. Without legislative relief, the Postal Service was required to make, and did make, its $5.5 billion payment to the Retiree Health Benefit Fund. The agency had sought a deferral to reduce the risk of defaulting on financial obligations in fiscal 2011, and it says that risk remains. Current forecasts anticipate insufficient cash to make a similar $5.5 billion payment in September 2011, even with planned cost controls.
The Postal Service notes that it has already implemented aggressive cost-cutting and productivity measures, and it continues to press Congress both to shift away from the pre-funding mandate and to address what it describes as an overpayment to the Civil Service Retirement System pension fund. The agency argues that these changes are necessary to remove constraints on its cash flow during periods of declining mail volume and to ensure it remains a viable business. All fiscal years referenced end September 30.
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